Types of life insurance policy

There are numerous different types of life assurance policy available on the UK market. Across the board, the cost of a life insurance premium will vary considerably depending on the characteristics of the person applying. These characteristics include health, age and occupation.

To ensure cover, it is essential to meet monthly premium payments.
As an individual holding a life assurance policy, you are termed ‘life assured’ with an ‘own life policy.’ This is not the case in all life insurance policy types: some may take the form of ‘life of another’ or ‘joint life first death’ policies. Premiums will vary considerably between types. There are three major types of life assurance policy: term assurance, whole life and endowment assurance.

The basic types of life assurance policy are as follows:

Term life assurance is one of the most commons types of life insurance policy, and also one of the most simple. Term life assurance only pays out if you die before the policy expires. Generally speaking, this type of policy requires a regular premium payment for a lump sum return in the event of the policyholder’s death. Some term insurance policies provide extra cover in the event of the policyholder contracting or developing a critical or terminal illness.

This type of insurance can be taken out separately from life insurance with some insurers, and covers the policyholder for serious illnesses that may not necessarily be fatal. The cover is paid out in the event of diagnosis, and not for the treatment of the disease or condition. In this instance, it is essential to know what your policy will pay out for, and what it won’t. Some will cover basic critical illnesses, whereas others will cover a more extensive variety of conditions. You must provide full medical history to your insurer to be certain that they will pay out in the event of a claim.

Level Term insurance could be useful to provide families with a payout in the event of the policyholder’s death. There is no payout if the policyholder outlives the terms of the policy.

Decreasing Term assurance is another type of life assurance policy, often used to cover mortgage payments. The payout sum on the policy will reduce over time, as the outstanding amount on a mortgage loan reduces. Some lenders require their borrowers to have a life assurance policy of this type before they will provide the mortgage loan. With Decreasing Term assurance your mortgage repayments will be covered in the event of your death.

Increasing term assurance refers to a policy that can be renewed at the end of a certain period for a higher premium that increases the sum paid out. That way, whenever the payout sum is increased the cost of premiums also increases. These policies often include conversion options.
Renewable Term assurance refers to a life assurance policy that is renewable following the set expiry date (usually at the age of 65.) Whenever a renewal date is reached the cost of the premiums will increase.

Index linked term assurance is an option provided by some insurance companies and anchors the sum assured and the premium to the RPI (Retail Price Index.) In some instances this will be automatic, others will have to renew every year.

Whole-of-life assurance guarantees a payout of a lump sum should the policyholder die, whenever this is. As long as the policyholder maintains the premiums, the cover is assured. Because of the increased security offered by this kind of policy, the premium is likely to be more expensive.

Convertible term assurance allows the policyholder to convert a term policy to a whole-of-life or endowment assurance policy at the culmination of the policy.

Family income benefit allows the benefit upon your death to be paid out to your family in regular payments. This provides them with a regular income over a selected period of time. This term is chosen by the policyholder at the beginning of the policy, and it generally provides a sum to replace lost earnings. This type of assurance can also be used for a particular purpose, such as the University fees for a child or children.

Endowment life assurance policies are savings schemes with life assurance attached. They were more common during the 1990s, and were often tied with mortgages. They are designed to pay out any returns at the end of the policy, or should the policyholder die pay out a lump sum. Endowments are often taken out with decreasing term assurance.